Why Beijing is ambivalent about free trade pact with Washington

As US President Donald Trump is getting increasingly pragmatic with his policies towards China, the trade issue, once a major bone of contention between Washington and Beijing, may offer an opportunity for the two countries to bring their relations to the next level.

There is already quite a lot of talk in the academe about the possibility of setting up a “Sino-US free trade zone”.

From China’s standpoint, there are undoubtedly a lot of incentives for facilitating a free trade agreement (FTA) with the United States.

According to a recent study conducted by the Purdue University, in West Lafayette, Indiana, an FTA would allow China to enjoy an extra 2.4 percent growth in GDP by 2025, with exports to the US increasing by 3.8 percent and imports by 4.8 percent.

China’s garment and transportation equipment industries would be the biggest beneficiaries.

A Sino-US free trade zone would also enable China to gain access to cutting-edge industrial technologies of US companies, something which Beijing has been longing for over the years.

For decades, the US government has been maintaining a tight grip on the country’s high-tech exports to China out of intellectual property rights and national security concerns.

However, by negotiating a bilateral FTA, Washington and Beijing can actually hammer out a clear legal framework through which American companies can export high-tech products to China or transfer advanced industrial technologies to their Chinese counterparts without undermining the national interests and security of the US, thereby creating a win-win situation.

On the strategic level, an FTA may also enhance the bilateral relations of the two countries.

Both the US and China initially had high hopes for the “US-China Strategic and Economic Dialogue” (S&ED), a regular and high-level communication mechanism between the two governments initiated by the Obama administration back in 2009.

Unfortunately, eight years on, the S&ED has failed to fulfill its intended role as a sustainable platform on which the two countries can settle their differences on various issues. Nor has it succeeded in enhancing communication and building trust between the two powers.

Since the S&ED has failed to serve its intended purpose, perhaps by concluding an FTA, Washington and Beijing can enhance their mutual strategic trust and thereby further reinforce the so-called “G2” relationship through which they can work out solutions to global issues.

However, from China’s perspective, despite all the potential economic and strategic benefits, there are also considerable risks attached to a Sino-US FTA.

An FTA would have to be an equal and mutually beneficial agreement. So while the US would have to further open up its market to Chinese products and loosen its control on high-tech exports to China, China would also have to widen market access to US companies.

However, since US companies have overwhelming advantages in various sectors such as the service and high-tech industries, the influx of US competitors into the Chinese market would almost certainly pose an enormous threat to China’s homegrown enterprises, both state-run and private.

Take the movie industry as an example. It is not difficult to imagine the magnitude of the challenge Chinese movie makers are likely to face once their government lifts all restrictions to Hollywood productions.

Another example is the banking and financial industry. For decades China’s banking industry has enjoyed protection from foreign competition. Once the barriers for US banks and financial institutions are gone, it’s difficult to tell whether China’s overprotected banking sector can survive the massive invasion of foreign competitors.

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